Download - High Tunnel Economics, 2015
![Page 1: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/1.jpg)
High Tunnel Economics
Beginning Grower Workshop:Getting Started in High Tunnel Production
Wednesday, February 17, 2015Brainerd, Minnesota
Karl Foord
![Page 2: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/2.jpg)
Basics
• Production
• Pest Management
• Irrigation
• Fertility
• Economics
![Page 3: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/3.jpg)
Economic Question
• Can I make “enough” money with this enterprise?
• “Life is at the Margin!”
![Page 4: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/4.jpg)
Margins & Market Channels
Consider the margins•Wholesale
•Retail
![Page 5: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/5.jpg)
Costs & price affect margin - I
Cost side• Tomato budget –Breakeven analysis
• Cost of construction of high tunnel–Profitability analysis (Net Present
Value)
• Critical factor– People Skills–Labor – Managing other people
![Page 6: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/6.jpg)
Costs & price affect margin - II
Revenue side• Gross Revenue = price x yield
• Critical factors – People Skills
–Managing the customer’s perception of value
![Page 7: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/7.jpg)
THE COST SIDE
![Page 8: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/8.jpg)
Yield (lbs. per plant) 7 10 14 17 20Yield (lbs. per tunnel) 3,136 4,480 6,272 7,616 8,960
VARIABLE COSTS
Fertilizer $40 $50 $60 $70 $80 Pest Control $50 $50 $50 $50 $50 Black Plastic Mulch $20 $20 $20 $20 $20 IRRIGATION
Dripline $25 $25 $25 $25 $25Drip Irrigation Operation $25 $25 $25 $25 $25
Plant Maintenance (Stakes, Twine) $30 $30 $30 $30 $30Bees for Pollination $100 $100 $100 $100 $100 Fuel (Tractor & Propane) $75 $75 $75 $75 $75 Transplant Materials $157 $157 $157 $157 $157 Packaging - Boxes (@$1.50) $147 $210 $294 $357 $420 Marketing (3% of ave. revenue) $50 $75 $100 $150 $200 LABOR Bed making & laying plastic $225 $225 $225 $225 $225
Transplanting $150 $150 $150 $150 $150Trellis - Training $200 $200 $200 $200 $200Weeding $30 $30 $30 $30 $30Ventilation & Monitoring $300 $300 $300 $300 $300Machinery Operation $35 $35 $35 $35 $35Harvest $300 $600 $900 $1,200 $1,500Grading/Packing $68 $81 $90 $113 $135Seasonal Cleanup $55 $55 $55 $55 $55Land Preparation* $55 $55 $55 $55 $55
Interest Expense $80 $96 $112 $128 $145
TOTAL VARIABLE COSTS $2,216 $2,643 $3,087 $3,550 $4,012
FIXED COSTS Land (rent of .2 ac at $150 per acre) $30 $30 $30 $30 $30 Depreciation $700 $700 $700 $700 $700
TOTAL FIXED COSTS $730 $730 $730 $730 $730
TOTAL COSTS $2,946 $3,373 $3,817 $4,280 $4,742BREAKEVEN PRICE
32# box $30.07 $24.10 $19.48 $17.98 $16.94 per pound $0.94 $0.75 $0.61 $0.56 $0.53
TUNNEL CROP BUDGET - TOMATOES
$/Tunnel (30' x 96' - 7 rows - 448 plts/tunnel)
![Page 9: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/9.jpg)
3,136 $2,1364,480 $2,5486,272 $2,9767,616 $3,4218,960 $3,867
Labor @ $15 per hour; Transplants @ $.35 ea* assigned a land preparation charge in lieu of machinery and equipment
Yield at 15 lbs. per plant =
Yield at 20 lbs. per plant =
Yield at 25 lbs. per plant =
Yield at 30 lbs. per plant =
Land area = 1.2 x area of tunnelInterest expense = 5% loan 9 month term on: variable expenses
Planting rate - 64 plants per 96 ft. row Yield (lbs./tunnel)
Variable expenses -
interestTunnel dimensions: 96' by 30'
96 ft x 30 x 7 rows = 448 plants per tunnel
Yield at 10 lbs. per plant =
TUNNEL CROP BUDGET - TOMATOES
Assumptions
![Page 10: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/10.jpg)
Low High
Site Prep.
Kit $6,239 $7,579
120man-hours
$15 per hr. $1,800
2,880 sq.ft.
$0.50 to $1.00 $1,440 to $2,880 $2,880
Non-kit Materials
$300 $500
Irrigation $300 $500
Misc. $150 $300
Totals $8,789 $11,759
High Tunnel Conference - 2/17/2015, Karl Foord
Obtained locally: baseboards, hipboards, rope, extra screws, metal banding
set up, headers, drip tape
Miscellaneouse items not anticipated
Construction cost range based on above estimates
Cost per tunnelConstruction
Cost Range
High Tunnel Construction Costs (30' x 96') excluding site preparation and shipping
per sq. ft. basisProfessional Construction
Estimate
Note: www.farmtek.com; one of a number of suppliers
Item
site specific
FarmTek - Economy vs. Premium Round Style High
Local Labor
![Page 11: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/11.jpg)
REVENUE SIDE
![Page 12: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/12.jpg)
Projected Gross Revenue
lbs./plant lbs./tunnel $1.50 $2.00 $2.50 $3.00 $3.50 $4.007 3136 1,758 3,326 4,894 6,462 8,030 9,59810 4480 3,347 5,587 7,827 10,067 12,307 14,54714 6272 5,591 8,727 11,863 14,999 18,135 21,27117 7616 7,144 10,952 14,760 18,568 22,376 26,18420 8960 8,698 13,178 17,658 22,138 26,618 31,098
Price per lb. ($)Yield
Price Yield Matrix - Net Revenue
![Page 13: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/13.jpg)
Evaluate the enterprise
• Is your money best spent in this way?• Projected profits vs. cost of entry• Sensitivity analysis–Optimistic, pessimistic, average
scenarios
![Page 14: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/14.jpg)
YEAR 0 1 2 3 4 5 6 7 8 9 10AVERAGE YIELD (lbs. per tunnel) 3136 3136 3136 3136 3136 3136 3136 3136 3136 3136AVERAGE PRICE (per pound) $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50REVENUES $4,704 $4,704 $4,704 $4,704 $4,704 $4,704 $4,704 $4,704 $4,704 $4,704EXPENSES $2,946 $2,946 $2,946 $2,946 $2,946 $2,946 $2,946 $2,946 $2,946 $2,946PROFIT / CASH FLOW ($11,000) $1,758 $1,758 $1,758 $1,758 $1,758 $1,758 $1,758 $1,758 $1,758 $1,758Depreciation (straight line) $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100Taxible income $658 $658 $658 $658 $658 $658 $658 $658 $658 $658Determine tax 30% $197 $197 $197 $197 $197 $197 $197 $197 $197 $197Subtract tax $460 $460 $460 $460 $460 $460 $460 $460 $460 $460Add depreciation back $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100Net revenue after tax $1,560 $1,560 $1,560 $1,560 $1,560 $1,560 $1,560 $1,560 $1,560 $1,560PV OF CASH FLOW @ 5.0 % ($11,000) $1,486 $1,415 $1,348 $1,284 $1,223 $1,164 $1,109 $1,056 $1,006 $958NPV @ 5.0 % $11,302 ($1,000)
$302
HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS - TOMATOES
Profitability Scenarios (10 year life expectancy of tunnel)
Scenario # 1 - Low Price ($1.50) / Low Yield (7 lbs. per plant)
YEAR
*Note: $1000 of expenses added in year 6 to replace plastic and account for other repairs needed for 10 year life of tunnel
![Page 15: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/15.jpg)
YEAR 0 1 2 3 4 5 6 7 8 9 10AVERAGE YIELD (lbs. per tunnel) 6272 6272 6272 6272 6272 6272 6272 6272 6272 6272AVERAGE PRICE (per pound) $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50REVENUES $15,680 $15,680 $15,680 $15,680 $15,680 $15,680 $15,680 $15,680 $15,680 $15,680EXPENSES $3,817 $3,817 $3,817 $3,817 $3,817 $3,817 $3,817 $3,817 $3,817 $3,817PROFIT / CASH FLOW ($11,000) $11,863 $11,863 $11,863 $11,863 $11,863 $11,863 $11,863 $11,863 $11,863 $11,863Depreciation (straight line) $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100Taxible income $10,763 $10,763 $10,763 $10,763 $10,763 $10,763 $10,763 $10,763 $10,763 $10,763Determine tax 30% $3,229 $3,229 $3,229 $3,229 $3,229 $3,229 $3,229 $3,229 $3,229 $3,229Subtract tax $7,534 $7,534 $7,534 $7,534 $7,534 $7,534 $7,534 $7,534 $7,534 $7,534Add depreciation back $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100Net revenue after tax $8,634 $8,634 $8,634 $8,634 $8,634 $8,634 $8,634 $8,634 $8,634 $8,634PV OF CASH FLOW @ 5.0 % ($11,000) $8,223 $7,831 $7,458 $7,103 $6,765 $6,443 $6,136 $5,844 $5,565 $5,300NPV @ 5.0 % $65,922 ($1,000)
$54,922
HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS - TOMATOES
Profitability Scenarios (10 year life expectancy of tunnel)
Scenario # 2 - Medium Price ($2.50) / Medium Yield (14 lbs. per plant)
YEAR
*Note: $1000 of expenses added in year 6 to replace plastic and account for other repairs needed for 10 year life of tunnel
![Page 16: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/16.jpg)
YEAR 0 1 2 3 4 5 6 7 8 9 10AVERAGE YIELD (lbs. per tunnel) 8960 8960 8960 8960 8960 8960 8960 8960 8960 8960AVERAGE PRICE (per pound) $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 $3.50REVENUES $31,360 $31,360 $31,360 $31,360 $31,360 $31,360 $31,360 $31,360 $31,360 $31,360EXPENSES $4,742 $4,742 $4,742 $4,742 $4,742 $4,742 $4,742 $4,742 $4,742 $4,742PROFIT / CASH FLOW ($11,000) $26,618 $26,618 $26,618 $26,618 $26,618 $26,618 $26,618 $26,618 $26,618 $26,618Depreciation (straight line) $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100Taxible income $25,518 $25,518 $25,518 $25,518 $25,518 $25,518 $25,518 $25,518 $25,518 $25,518Determine tax 30% $7,655 $7,655 $7,655 $7,655 $7,655 $7,655 $7,655 $7,655 $7,655 $7,655Subtract tax $17,863 $17,863 $17,863 $17,863 $17,863 $17,863 $17,863 $17,863 $17,863 $17,863Add depreciation back $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100Net revenue after tax $18,963 $18,963 $18,963 $18,963 $18,963 $18,963 $18,963 $18,963 $18,963 $18,963PV OF CASH FLOW @ 5.0 % ($11,000) $18,060 $17,200 $16,381 $15,601 $14,858 $14,150 $13,476 $12,835 $12,224 $11,641NPV @ 5.0 % $145,679 ($1,000)
$134,679
YEAR
*Note: $1000 of expenses added in year 6 to replace plastic and account for other repairs needed for 10 year life of tunnel
HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS - TOMATOES
Profitability Scenarios (10 year life expectancy of tunnel)
Scenario # 3 - High Price ($3.50) / High Yield (20 lbs. per plant)
![Page 17: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/17.jpg)
Scenario Cucumbers Grape tomatoes Peppers Strawberries Tomatoes
Low ($8,256) $26,715 ($3,705) ($8,757) $302
Med $30,561 $98,492 $30,298 $13,353 $54,922
High $91,685 $184,479 $83,654 $44,301 $134,679
Higher $135,710 $75,634
Comparison of NPV Scenarios
![Page 18: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/18.jpg)
PRICING
![Page 19: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/19.jpg)
Pricing - general thoughts
• Business vs. Customer Perspective
• Behaviors and attitudes
• Strategic pricing
![Page 20: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/20.jpg)
PERSPECTIVE
Business vs. customer
![Page 21: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/21.jpg)
MARGIN
PRICING DECISION CHART
Va
ria
ble
Co
sts
Direct Costs Materials
Profitable Enterprise WIN - WIN Exchange
Total Costs LOSE - WIN Exchange
Fix
ed
Co
sts
Overhead Salaries, Etc…
COMPANY VIEW Our Asking
Price
Pricing Goal ($)
Profit
Our Costs - Our Goals
No Exchange
![Page 22: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/22.jpg)
Satisfy a Want
Perceived Value > Price
Convenience
Philosophical Match - Ecological
Health Benefits
Quality - Reputation - Dependability
Selection - Uniqueness
Confidence: no frustrations, headaches
Reference Prices
Context - Urgency
PRICING DECISION CHART
WIN - WIN Exchange
Price Window
FunctionalityLow Perceived Value
Focus of Marketing Efforts
Emotional Benefit
Perception Factors
Customer Value
Determination
CUSTOMER VIEW
WIN - LOSE or No Exchange
Line of Perceived Value
![Page 23: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/23.jpg)
![Page 24: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/24.jpg)
Exchange• Something of Value for an amount
of satisfaction
• Largely behavioral not mathematical
• Usually an emotional trigger
–Buy and justify
• Perceived value > price
![Page 25: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/25.jpg)
What Are We Really Selling?
“Revlon sells chemicals
Women buy glamour”
• Fruits & vegetables
• Flowers
![Page 26: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/26.jpg)
What Are People Really Buying?
• Health• Taste• Support of local growers• The experience of the market
itself• This experience is the future in
marketing
![Page 27: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/27.jpg)
Variation among customers
• Buyers use products in different ways
• Product attributes change rankings
• Rankings impact value equation • Value varies among buyers
![Page 28: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/28.jpg)
Value perception equation
• Value = quality + service + relationship + price
![Page 29: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/29.jpg)
PERCEPTION FACTORS
![Page 30: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/30.jpg)
Quality - internal • Quality
• Philosophical Match
–Ecological –Organic / Natural
• Selection – Uniqueness
• Context – Urgency
• Health Benefits
![Page 31: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/31.jpg)
Service - external • Convenience
• Confidence
–No frustrations–No headaches
• Reputation
• Dependability
• Reference Prices
![Page 32: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/32.jpg)
Improving customer experience
• Parking & Access• Ease of movement within market• Stall Presentation
– Cleanliness– Culls & sorting out of sight
• Comfort in all weather• 5 Sense your market
– Taste, touch, smell, sight, sound • Do you provide recipes?
– Sensory extrapolation
![Page 33: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/33.jpg)
Proactively manage customer perception
• Attending to customer perceptions increases perceived value
• Increasing perceived value minimizes the price component of the value equation
• Keeping perceived value high permits high (fair) prices
• High (fair) prices permit good margins & successful businesses
![Page 34: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/34.jpg)
Price• One important factor in our plan is that
we are not afraid to ask a profitable price for all of our produce.
• Our customers need to be aware that it costs more to produce early crops and we must remember that highest quality is the only crop you should market.
• Ed Person, Ledgewood Farms
![Page 35: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/35.jpg)
EQIP (Environmental Quality Incentives Program)
• Financial assistance is limited to a maximum size of 2,178 square feet of land under the high tunnel per USDA identified agricultural operation.
• The NRCS payment rate will be $1.89 per square foot.
• $1.89 per ft. x 2178 feet = $4,116.42
![Page 36: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/36.jpg)
Google NRCS funding for high tunnels
• NRCS High Tunnel Cost Share Update
• http://swroc.cfans.umn.edu/prod/groups/cfans/@pub/@cfans/@swroc/documents/asset/cfans_asset_330313.pdf
![Page 38: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/38.jpg)
Handouts
• Tomato Budget (2 sided assumptions on back)
• Tomato Sensitivity Analysis (financial)
• High Tunnel Construction Budget
• Pricing Decision Chart
![Page 39: High Tunnel Economics, 2015](https://reader031.vdocument.in/reader031/viewer/2022020218/55a669651a28abdc7e8b45e4/html5/thumbnails/39.jpg)
References
• http://www.ledgewoodfarm.com/• http://www.farmtek.com/farm/supplies/home
• http://plasticulture.cas.psu.edu
• http://www.plasticulture.org
• http://www.intrinsiccoach.com/english/home/